Sergey Panteleev, General Manager at Varengold’s branch in Bulgaria, tells us why outsiders have got it so wrong when it comes to the region Central and Southeast Europe is not typically regarded as prime investment territory for fintechs.
But Varengold Bank, having already developed a strong track record in European marketplace banking and providing long-term, sustainable support for fintechs and peer-to-peer (P2P)lending platforms, chose Bulgaria in 2018 as a hub for extending its activities in Central and Eastern Europe (CEE) and the Balkans. Its mission? To seek out emerging technologies in an area that has witnessed a significant amount of digital as well as non-digital disruption.
According to Sergey Panteleev, who heads up Varengold’s Bulgarian office, the conflicts and upheaval that scarred this region in the late twentieth century are one of the reasons the bank is there.
“Eastern European countries were on the wrong side of the Iron Curtain so, when it fell, lots of entrepreneurial spirit was unleashed,” he says.
Different countries went at different speeds towards what he describes as ’liberated capitalism’. But Bulgaria was out in front. It had already invested heavily in technical training in the Seventies, which sowed the seed for a strong digital payments sector to emerge, one that was attracting global research and development funding by the dawn of the Noughties.
Homegrown international businesses to have earned widespread recognition since include Paysafecard, SafeCharge, SumUp, EMerchantPay, iCard, Epay and Paynetics, not to mention online trading platforms Trader.bg and Trading 212, which operate in both Bulgaria and the UK. In August, Paynetics AD, digital banking platforms provider Phyre and Bulgarian telecoms provider Vivacom, launched the Mastercard Digital First card – the first payment card of its kind in Central and Eastern Europe and one of the first in the whole of Europe.
“We have 70-plus fintechs here in Bulgaria and more are popping up every day,” says Panteleev. “Of course, COVID slowed things down a bit, but it was inevitable that we should come here to join this fast-growing fintech community.”
It’s nevertheless a community that’s been largely overlooked and under-reported by the fintech world. That could change following publication of Findexable’s Global Fintech Index – the new fintech world rankings which shook up perspectives on the region by placing Lithuania fourth on the list (behind the US, the UK and Singapore, and just ahead of Switzerland). While Bulgaria itself didn’t make the top 50, Bulgarian fintech leaders would do well to prepare themselves for the spotlight – their country has the fastest-growing fintech market in Southeast Europe (SEE). The fintech sector’s contribution to GDP has more than doubled since 2014, and last year their net income reached €212million.
“We have a strong startup ecosystem,” explains Panteleev. “Historically, Bulgaria was under the influence of the Soviet Union, which gave rise to IT specialism. Then, in recent years, institutional investors came in – creating fertile ground for fintech. In the beginning, it was a matter of copying and pasting [from Western Europe], but now we are integrating new models and are really booming. This is the sweet spot for us: to provide funding to businesses that, for some reason, are not able to get it.”
In many ways, the region is the perfect fintech and paytech petri dish – plenty of university graduates who specialised in technology, lower fixed costs than Western Europe and accessible markets – which is why so many Western companies outsource to the area. Many employees of London corporations wearily dial what they think is their internal IT team when their computer crashes, only to reach an advisor in Bulgarian capital Sofia.
According to a report last year from KPMG, the trend of large regional Western European banks dismantling their business arms in the region is creating openings for new, nimble players. That said, among the top 10 banks that continue to operate in Bulgaria, UniCredit, Raiffeissen and Société Générale are well advanced when it comes to digital transformation and operate accelerators, partnerships and outsourcing from which fintechs benefit.
KPMG also observed that privatisation programmes by governments in the Western Balkans ‘to relinquish the burden of running large retail banks’ are creating openings for investors looking to tap into the growth markets of Southeast Europe.
And, even better for Varengold, given its focus on credit platforms, KPMG forecast that, in the next two years, ‘changes in legislation, combined with improving fundamentals, should see almost all countries experiencing lending growth’.
One of the bank’s early investments in the region was Sofia-based Klear Lending, the P2P platform that was named best fintech startup in Bulgaria at the 2017 and 2018 Central European Startup awards. In 2019, Varengold took a 20 per cent equity stake in Klear, and provided additional debt financing.
The success of platforms like Klear is not so surprising when you consider the overall rate of financial digital adoption in CEE. The top five countries with the highest share of contactless payment transactions at point-of-sale (POS) in Europe, in 2018, for instance, were all from this region, according to data published by Mastercard and Statista. Remember, CEE skipped some of the legacy steps supported by payment institutions in Western Europe – it went straight from cash to cards and now virtual cards.
That has been facilitated by an equally unencumbered mobile network infrastructure, providing ultra-fast broadband quicker than in the West. Hungary and the Czech Republic have 80 per cent coverage and Latvia more than 90 per cent. Meanwhile, the area’s upheaval and subsequent accession of almost every one of its states to the EU, provided another upside for fintechs: the flight of nationals to find employment abroad created significant remittance flows – sometimes a third of gross domestic product (GDP), giving fintechs plenty of opportunity to cut out the middlemen and reduce fees with mobile transfers using multi-currency accounts.
Thirty-four per cent of fintechs in SEE fintech hub Sofia, focus on payments, says the Bulgarian Fintech Association.
So, given all of that, why has investment in fintech and paytech not been as fast as one might expect? Probably because, as the Russians were fond of saying after the collapse of the Soviet Union: ’It’s easier to turn an aquarium into fish soup than to turn fish soup into an aquarium’. While, in 1989, many countries, including Bulgaria, Hungary and Romania, broke free of the Soviet Union and embraced free markets, there is no quick way to undo communism – an absence of old order did not stop local institutions from retaining significant levels of inefficiency, bureaucracy and sometimes even corruption. But change is finally and rapidly spreading.
In 2012, the European Investment Fund allocated €21million to two Bulgarian venture capital funds. They, in turn, invested in more than 100 startups, creating supportive conversations with regulators and industry bodies.
“Many Eastern Europeans understand that the only way to have competitive advantage over older money and economies is to invest in innovation and education,” says Panteleev.
“If you provide a sandbox for people to work together, sustainably and correctly, without over-regulating it, you get results.”
New challenge, new openings
COVID hasn’t blown Varengold’s mission off course. If anything, it’s emboldened it.
“COVID proved that we should focus more on digitisation,” says Panteleev, adding that any lingering resistance to using digital finance has faded during the pandemic, which fed through to robust performance for fintechs and paytechs.
The bank’s commitment to the credit marketplace has also continued to prove well-placed. Klear’s metrics show that, while applications for loans via its platform dropped in the first few months of the pandemic, they began to recover in June. Meanwhile, all the negative indicators, including payment postponements and non performing loans, remained in low, single-figure percentages. At the same time, its investors stayed loyal.
“During the past few months those guys have really proved their model,” says Panteleev. “We showed that if you have a good platform, a reliable infrastructure and scoring that’s up to speed, you’re faster at adapting than conventional institutions and pretty resilient to shake-ups like a pandemic.”
Nevertheless, economies in this mountainous region are now climbing steeper economic slopes. And, while governments have not put obstacles in fintech’s way, neither have they provided it with all the enabling policy frameworks seen in Western Europe, says Panteleev. His message to those governments is this: “Think about it. Because we can be really fast in supporting the economy after COVID.”